On December 4, 2015, President Obama signed into law the SBIC Advisers Relief Act (the “Act” as part of H.R. 22, the Fixing America's Surface Transportation Act of 2015—the FAST Act). The Act amends three provisions of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) relating to an exemption from investment adviser registration for advisers to SBIC funds and state regulatory authority with respect to such SBIC fund advisers. The long awaited Act grants important relief for many SBIC fund advisers that either remain registered with, or report to, the SEC despite the availability of the SBIC fund adviser exemption created by The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (the “SBIC Fund Adviser Exemption”).1 The Advisers Act amendments, their impact and important next steps are discussed below.
Amendments to Section 203(l)(Exemption of Venture Capital Fund Advisers) and Section 203(m)(Exemption of and Reporting by Certain Private Fund Advisers)
Since the SBIC Fund Adviser Exemption requires relying advisers to advise solely SBIC funds, advisers who also advise venture capital funds, private funds or other clients could not avail themselves of the SBIC Fund Adviser Exemption.2 As an alternative, some of those advisers have been able to remain unregistered with, but report to, the SEC in reliance on the Dodd-Frank exemptions for advisers who solely advise venture capital funds (the “Venture Capital Fund Adviser Exemption”) or for advisers who solely advise private funds and have assets under management in the United States of less than $150,000,000 (the “Private Fund Adviser Exemption”).
However, some SBIC fund advisers could not avail themselves of either the Venture Capital Fund Adviser or Private Fund Adviser Exemptions. For example, an adviser who advises a SBIC fund that did not meet the definition of a venture capital fund could not rely on the Venture Capital Fund Adviser Exemption or combine the two exemptions. The adviser had to remain SEC registered unless and until another exemption would be available. To address this issue, the Act amends Section 203(l) of the Advisers Act by defining a venture capital fund to include a SBIC fund (other than BDC).
Additionally, an adviser who advises a SBIC fund that meets the definition of a private fund could not rely on the Private Fund Adviser Exemption if the assets of the SBIC fund would take the aggregate private fund assets managed by the adviser over the $150,000,000 limit. The Act amends Section 203(m) of the Advisers Act to exclude from the Private Fund Adviser Exemption $150,000,000 asset limit, the assets of a private fund that is a SBIC fund (other than a BDC).
Amendment to Section 203A(b)(Advisers Subject to Commission Authority)
Significantly, many SBIC fund advisers who could avail themselves of the SBIC Fund Adviser Exemption would still be subject to state investment adviser registration requirements unless a state exemption were available. Prior to the passage of the Act, Section 203A(b) prohibited states from requiring state registration, licensure or qualification of investment advisers who were either registered with the SEC or who were excepted from the definition of an investment adviser under Section 202 (a)(11) of Advisers Act. Advisers relying on the SBIC Fund Adviser Exemption were neither registered with the SEC nor excepted from the definition of investment adviser and, therefore, were still subject to state registration unless another exemption was available.
Some, but not all states, have adopted mirror or similar Dodd-Frank exemptions from registration for SBIC fund, venture capital fund or other private fund advisers. In those states that have not adopted an exemption such as the SBIC Fund Adviser Exemption, but have adopted mirror or similar private fund or venture capital exemptions, some SBIC fund advisers have alternatively relied upon those exemptions at the federal and state level.
Relying on either the Private Fund Adviser Exemption or the Venture Capital Fund Exemption means reporting as an exempt reporting adviser at both the state and federal level—a potentially timely and costly exercise for many SBIC fund advisers who have small operations and budget constraints. Indeed, unlike advisers relying on the SBIC Fund Adviser Exemption, exempt reporting advisers are also subject to additional regulatory requirements under the Advisers Act, including, but not limited to, Section 204’s required reporting on Form ADV and certain recordkeeping requirements, as well as Section 204A’s requirement to implement written policies and procedures reasonably designed to prevent the misuse of material non-public information (MNPI).
To the great relief of many SBIC fund advisers, the Act amends Advisers Act Section 203A(b)(1) to preempt states from requiring advisers relying on the SBIC fund exemption to register, license or qualify as an investment adviser in the state. Although SBIC fund advisers may remain subject to SEC and state regulatory authority for anti-fraud purposes, they are not required to register or report at either the state or federal level. Accordingly, those qualifying as SBIC fund advisers may withdraw their SEC registrations or file their final exempt reporting adviser report with the SEC, as applicable.
SBIC fund advisers who are either currently registered with the SEC but would be able to rely on the SBIC Fund Adviser Exemption, should review their current operations and discuss with legal counsel the advantages and disadvantages of withdrawing from SEC registration and relying on the SBIC Fund Adviser Exemption and state preemption provisions under the amended Advisers Act. SBIC fund advisers who are currently exempt reporting advisers relying on either the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption who would otherwise qualify for the SBIC Fund Adviser Exemption should do the same to determine whether to file their final report on Form ADV as an exempt reporting adviser and rely on the SBIC Fund Adviser Exemption and state preemption provisions under the amended Advisers Act.
1 As amended by Dodd-Frank, Section 203(b) provides an exemption from SEC registration for any investment adviser, other than any entity that has elected to be regulated or is regulated as a business development company pursuant to section 54 of the Investment Company Act of 1940, as amended (a “BDC”), who solely advises: (i) small business investment companies that are licensees under the Small Business Investment Act of 1958 (the “SBIA”); (ii) entities that have received from the Small Business Administration notice to proceed to qualify for a license as a small business investment company under the SBIA, which notice or license has not been revoked; or (iii) applicants that are affiliated with one or more licensed small business investment companies and that have applied for another license under the SBIA, which application remains pending (each referred to herein as, a “SBIC fund”).
2 See Release No. IA-3222, Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, at page 78. https://www.sec.gov/rules/final/2011/ia-3222.pdf.